Saving vs. investing:Is there a difference?
Saving. Investing. It’s all the same,right?
Not necessarily.
When Vanguard clients come to me forfinancial advice, they often use the terms “saving” and “investing” interchangeably.Most of the time, they refer to longer-term goals—“I’m saving for my son’scollege education,” for example, or “What’s the best way to invest in my IRA?”
But I’ve also seen clients treating“saving” and “investing” the same way that is, they use the same approach orasset types to pursue a goal, whether short-term or long-term. For instance,one client who was still very much accumulating money for retirement asked me,“How much cash should I keep in my portfolio?” Another client told me heconsidered his stock funds his “emergency money.”
Saying “saving” when you really mean“investing” in a conversation with your financial planner isn’t going to impactreaching your financial goals. But acting like an investor when you should beacting like a saver, or vice versa, can have real potential to hurt yourchances.
There IS a difference
Think of “saving” as putting money asidefor a short-term goal, one that you’ll fund primarily with your own dollars. Ifyou sock away money to purchase a home or replace your car, you have asaving objective. You’ll likely accumulate a small portion of the funds you’llneed from earnings, but the bulk of the money you’ll use will come out of yourown pocket.
Conversely, “investing” is putting moneyaside for a long-term goal, one that will be funded a great with the year-in,year-out compounded returns of stocks and bonds. Amounts needed for retirementand possibly college are so large that likely the only way you can reach themis with the help of the investment markets.
Savings are “insurance,” not investment
Generally, you’ll spend savings withinone to three years, so the risk you take with that money needs to be low. Moneymarket funds, bank savings acｃounts, CDs— “cash” vehicles—are perfectlyappropriate for savings, even in a low-interest-rate environment such as thesedays.
The reason? You don’t have time forreturns to compound or, more important, to recover your money if an“investment” goes sour. Sure, whatever your savings earn will make littledifference in reaching your goal. But losing 10%, 20%, or 50% of what yousaved, by taking on the extra risk of stocks or longer-term bonds, could make ahuge difference.
“Cashis not an investment,” I tell clients. “Cash is like a free insurance policyyou own that ensures you’ll have the money you need to spend, when you needit.”
Invest with stocks and bonds, not cash
Since cash is not an investment, itreally has no place in a long-term portfolio.
Holding cash in a retirement portfolioguarantees only one thing: low returns on that portion of your portfolio, whichmeans less compounding and lower overall returns over the long run.
Investors who have been holding cash inmoney market funds the last few years, waiting for a stock market correction ora jump in interest rates, are still waiting (the last few weeks of stock andbond volatility notwithstanding). In the meantime, they missed out on2013, one of the best years for stocks ever, and month after month of interestpayments from bonds (which may have been low, but were still more than zero—theamount their money market funds have basically earned).
Cash savings have their purpose—forspending, and for the curveballs life can throw at us. Investments suchas stocks and bonds are best suited for reaching those longer-term goals thatmost of us can’t reach by saving alone. Know the difference to give yourselfthe best chance of financial success.
Article Source: http://vanguardblog.com/2015/02/20/saving-vs-investing-is-there-a-difference-2/
ImageSource: https://encrypted-tbn1.gstatic.com/images?q=tbn:ANd9GcQXtufDglc5ALxNoiCD0h4BTCQxKgnTodpsh8mIYqE4udBw9UUO
VOCABULARY WORDS:
1. Interchangeably(adv.) ~ capable of being put or used in the place of each other
2. Portfolio(n.) ~ the complete investment held by an individual investor or by a financialorganization
3. Sockaway (phrasal verb/ informal) ~ to put money away in a safe place for futureuse
4. Missout (v.) ~ to leave out or overlook
5. Curveball(n./ slang) ~ something that is unexpected or designed to trick
QUESTIONS FOR DISCUSSION:
1. Accordingto the articles, how is investing different from saving?
2. Whichdo you think is a better option for a more stable future, investing or saving?
3. Whatis the most important step that one should take before investing his/her money?
